Business Risks

1. Foreign Exchange Fluctuations

The Furukawa Company Group engages in production, procurement, and sales activities in Japan and overseas, and therefore is at risk of foreign exchange fluctuations in connection with its export business, the import of raw materials, primarily copper ore, and smelting and processing income. While the Group utilizes foreign exchange contracts and other methods to mitigate this risk, its operating results and financial position may be adversely affected by significant movements in exchange rates.

2. Fluctuations in Nonferrous Metals Markets

International prices of electrolytic copper, a mainstay product of the Group, and other nonferrous metals are decided by the London Metals Exchange (LME) in U.S. dollars to reflect international market conditions. Such prices fluctuate according to the international supply - demand balance, speculative transactions, international political and economic circumstances, and the like.
Accordingly, the Group utilizes forward delivery transactions and other hedging techniques to minimize the impact of fluctuating LME prices. However, significant movements in such prices may affect the Group's operating results and financial position.
The Group also invests in overseas copper mines to procure copper concentrate. Any fluctuations in LME prices may impact the business performance of those mines, which may affect the Group's operating results and financial position.

3. Interest Rates

The Group's fiscal year-end balance of interest-bearing liabilities (debt) was ¥69,683 million, equivalent to 31.9% of total assets. Any increase in debt-related costs arising from changes in interest rates may adversely affect the Group's operating results and financial position. Although funding costs may increase if market interest rates rise, the Group has prepared for sudden changes in interest rates by utilizing an optimal combination of borrowing arrangements, including fixed-rate instruments.

4. Investment Securities and Land

Historically, the Furukawa Company Group has maintained holdings of investment securities, which are subject to market valuations, as well as land. As of March 31, 2021, the carrying value of investment securities as stated in the balance sheets was ¥29,137 million, while land stood at ¥53,437 million. Accordingly, the Group's operating results and financial position are at risk of impairment losses, losses from devaluation, and losses on sales if securities and land prices decline significantly.
Regarding securities, every year the Board of Directors comprehensively considers the benefits and risks associated with individual holdings, both qualitatively and quantitatively, in order to verify the suitability of maintaining such holdings. Securities judged to be unsuitable as a result of such verification are sold.

As for other fixed assets held by the Group, a significant deterioration of business conditions could result in a decline in profitability, while falling market prices could lead to impairment losses. Any of these factors may adversely affect the Group's operating results and financial position.
In fiscal 2021, the Rock Drill Machinery segment reported an operating loss, due mainly to the spread of COVID-19. Any future changes in the business environment may lead to a decline in profitability and make the Group unable to recover investments, resulting in impairment losses.

5. Fluctuations in Demand

The Furukawa Company Group's products are sold both in Japan and overseas. Therefore, any major fluctuations in demand in its major markets - such as Japan, North America, Europe, and Asia - may adversely affect the Group's operating results and financial position. Due to the nature of its products, moreover, sales from domestic public works projects account for a high proportion of net sales. Therefore, any major fluctuations in public investments may adversely affect the Group's operating results and financial position.

6. Country Risk

The Furukawa Company Group conducts its production, procurement, and sales activities on a global basis in order to expand its sales network, strengthen cost-competitiveness, and reduce currency risk. Any number of local events could hamper the Group's smooth business operations. These include local political unrest, sharp economic slowdown, deterioration of public security, trade sanctions, cultural and legal differences, special labor - anagement relations, and terrorism. Such events could affect the Group's operating results and financial position."

7. Natural Disasters, Infectious Diseases, and Other Force Majeure

The occurrence of natural disasters (such as earthquakes, tsunamis, floods, and typhoons) and accidents (such as large-scale fires) could cause substantial damage to the Group's production facilities and procurement sources and a breakdown of its distribution network. Also, the worldwide spread of infectious diseases, such as COVID-19, could render inoperable the Group's business operations and owned facilities, as well as the operations of its suppliers. Either of these events may prevent the Group from supplying products in a reliable manner, which could affect its operating results and financial position.

Regarding the worldwide spread of COVID-19, which materialized in early 2020, the virus continues to spread, with the exception of some countries and regions, and there is no indication of when the pandemic will be brought under control. The Group has taken rigorous measures to prevent infections among employees, including introduction of stringent hygiene management and teleworking systems. If the pandemic continues for a prolonged period, however, our operations may be suspended due to employee infections, while any slowdown in the supply chain and suspension or contraction of customers' business activities could lead to a decline in revenue, which could affect the Group's operating results and financial position.

The Group has taken the following measures to ensure the safety of its employees and to ensure the sustainability of each of its businesses.

Measures to prevent the spread of COVID-19
To prevent the spread of COVID-19 to the maximum extent possible, employees in areas where local governments have issued urgent requests to stay at home, we introduced staggered working hours on February 27, 2020 and a work-from-home arrangement on March 27, 2020. Since April 7, 2020, when the national government declared a state of emergency, the Group has made all employees aware of the measures to prevent the spread of COVID-19, and published related information on its corporate website.
Main measures taken to prevent infection
  • Reducing infection risk of infection through telecommuting, shortened working hours, rotating work schedules, etc.
  • Preventing airborne infection by installing partitions between desks and in office meeting rooms
  • Increasing the number of shuttle buses between production facilities and nearest railway stations, and introducing timebased systems at employee cafeterias
Main measures to prevent infection
  • Meetings, events, dinners, business trips,after hours
  • Measures to ensure health
  • Response to set onset of cold symptoms and close contact
Cash flow measures to address COVID-19
The Group has entered into overdraft and commitment line agreements with financial institutions in order to raise working capital efficiently. To immediately address any unexpected need for funds stemming from the COVID-19 pandemic, however, in fiscal 2021 we procured long-term working capital and sold investment securities in order to secure liquidity on hand.
Procurement of long-term working capital Raised ¥10 billion in long-term working capital from financial institutions in May 2020 (of which ¥8 billion was repaid in February 2021)
Sale of investment securities ¥5.4 billion in proceeds from sale of investment securities in August 2020

The Group has eight business segments: Industrial Machinery, Rock Drill Machinery, UNIC Machinery, Metals, Electronics, Chemicals, Real Estate, and Others. The impact of the COVID-19 pandemic varies from segment to segment, and the outlook for the period during which it will affect the Group is uncertain.Therefore, it is difficult to rationally calculate the magnitude of impact that the pandemic may have on the Group's business environment.
The major impacts on each of our Group's segments which are assumed at this current point in time, are as follows.

Potential and major risks related to operating performance in each segment as the result of COVID-19 pandemic
Industrial Machinery Most of the products in the Industrial Machinery segment are made-to-order mainly for the Japanese market. There is stable demand for investments into national resilience, disaster prevention, and disaster mitigation, as well as for countermeasures involving the renewal and repair of aging facilities. While there are concerns about the impacts to be felt owing to the spread of COVID-19 (i.e. the suspension or postponement of construction projects), we assume that any such impacts will be limited.
Rock Drill Machinery While there has been no impact on demand for drill jumbos in Japan, demand for products such as hydraulic breakers and hydraulic crawler drills was impacted and is expected to recover gradually starting in the middle of fiscal 2022. These impacts were a result of the decline seen in the operating rates of machinery and temporary postponements of new machinery purchases due to economic uncertainty. With the exception of some countries and regions such as China, economic activity levels remain low overseas with the operation rates of machinery also remaining low. Although we are seeing regional differences in terms of a return to normality in the wake of the pandemic and in terms of the extent to which recoveries are taking place, we expect to see only a slight recovery during fiscal 2022 and a full recovery during the fiscal 2023.
UNIC Machinery In Japan, orders for UNIC cranes (Truck-mounted UNIC Cranes) have been experiencing a recovery trend since the middle of fiscal 2021. Although the impact of COVID-19 pandemic will also be limited during fiscal 2022, it will take some time for a full-scale recovery to take place in terms of demand for investments made by wide-area rental companies and for transactions taking place between companies. In terms of what is happening overseas, we are seeing a recovery trend in Southeast Asia, Europe and the United States, where the effects of COVID-19 pandemic were significant. Although that is the case, there was only a slight recovery experienced during fiscal 2022. A full-fledged recovery is expected during the fiscal 2023.
Metals Demand in Japan for copper wire is expected to remain weak due to reductions in capital investments. Demand for other copper products however, is expected to be solid due to a recovery resulting from expanded automobile production. Additionally, while we have been almost on schedule with our procurement of raw materials, we are seeing worse conditions of ore procurement due to tight supply mainly owing to strong demand on the part of Chinese copper smelters. Meanwhile, new copper mine projects have seen delays and we are seeing insufficient supply owing to the COVID-19 pandemic.
Electronics The majority of products in the Electronics segment consist of raw materials and parts for smartphones, various electric devices, automobiles, aircraft, and so on. Demand has been on a recovery trend since the second quarter of fiscal 2021. If we again see an impact on production activities of these industries as a result of the spread of COVID-19, we do have concerns that this may lead to a decrease in demand for our mainstay products, such as high-purity metallic arsenic, crystal products, and coils. We do, however, expect the recovery trend to continue.
Chemicals Although the spread of COVID-19 affected demand for sulfuric acid and other products, many products in the Chemicals segment are related to lifelines, such as chemicals used for sewage and wastewater treatment. We expect demand to recover during fiscal 2022 as customers finish up with inventory adjustments. The impact on the procurement of some raw materials, such as cuprous oxide and copper oxide, is expected to continue through the first half of fiscal 2022.
Real Estate We are providing support so that business can continue even amid the COVID-19 pandemic, including partial rent reductions and exemptions for commercial tenants at a key building, the Muromachi Furukawa Mitsui Building (COREDO Muromachi 2). However, we do assume that it will take time things to return to normal for visitors. We also assume that it will take some time before successor tenants move into spaces where tenant contracts have ended.

8. Product Quality

The Group manufactures products in accordance with globally recognized quality control standards and strives constantly to establish, maintain, and improve its quality assurance system. However, there is no guarantee that all products will be defectfree in the future. To mitigate such risk, we take out product liability insurance, recall insurance, and the like. However, in the event that a product defect leads to major liability claims or recalls that exceed our expectations, public trust in the Group and its products may be lost, which could affect its operating results and financial position.

9. New Product Development

The Group actively engages in new product development with the aim of bringing to market products incorporating new technologies and functions that meet customer needs. In some of our businesses, however, there are products that are in mature stages of their life cycles. Such products may be subject to reduced profit margins because they are difficult to differentiate from the competition. If the Group is unable to develop or market new products that will become future pillars of such businesses, its operating results and financial position could be affected as a result.

10. Human Resources

To achieve future growth, the Group hires talented people - both new graduates and mid-career professionals - and provides training to enhance their competitive strengths. If the Group is unable to attract sufficient human resources required for its business, however, its operating results and financial position could be affected as a result.

11. Environmental Protection

"The Furukawa Company Group places the highest importance on environmental protection, environmental safety, and prevention of pollution at its various business sites, both in Japan and overseas, respecting all laws and regulations. Furthermore, in Japan the Group takes all necessary measures to ensure proper environmental management of suspended and closed mines, including prevention of water pollution from such mines, as well as managing the safety of tailing dams. Due to changes in relevant regulations, however, legislation may be tightened and unexpected situations may arise at each business site, which could increase the cost of responding and thus affect the Group's operating results and financial position."

12. Official Regulations

The Furukawa Company Group engages in business in Japan and overseas and thus is subject to legal regulations of various nations, including rules related to licensing, taxation, the environment, labor, antitrust, and export controls. The Group takes care to faithfully comply with such official regulations. Due to changes in laws and regulations, however, existing legislation may be tightened or new legislation enacted, which could increase the cost of responding and impact business continuity, and thus affect the Group's operating results and financial position.

13. Retirement Benefit Obligation

The employees of the Furukawa Company Group are covered by a defined benefit corporate pension plan and a non-contributory funded employee pension plan. Liability for retirement benefits are provided at an amount calculated based on the retirement benefit obligation and the fair value of pension plan assets at the balance sheet date as of March 31, 2021. In calculating retirement benefit obligation, the Group adopts assumptions in connection with the discount rate and expected rate of return on plan assets, as well as other assumptions. However, the Group's operating results and financial position are at risk in the event that the actual discount rate and expected rate of return on plan assets differ materially from the assumptions, as well as in the event of a change in the assumptions on which retirement benefit obligation are made.

As of 29st June, 2021